Crowdfunding has proven to be an effective way for small businesses to generate revenue, and the trend is expected to double that success in the next year.
According to the Crowdfunding Industry Report from MassSolution, campaigns raised at least $2.7 billion last year, and that amount should double in the next year. Much of that activity has occurred in Europe and the United States, where bank lending to small businesses has been in decline for a number of years.
The MassSolution report notes that 2012’s figure is an 81 percent increase over the previous year. The report collected data from 308 active crowdfunding platforms around the world. More than a million fundraising campaigns were successfully launched through crowdfunding.
The expected continued success of crowdfunding platforms will be buoyed by regulations in the U.S. currently under consideration. The passage of the Jumpstart our Business Startups (JOBS) Act last year legalized the funding source, according to a Reuters report. However, until the SEC issues regulations implementing the JOBS Act, the promise of crowdfunding legalization has yet to be realized.
Reuters notes that crowdfunding still doesn’t see as much lending volume as banks to small businesses. But as traditional lending declines, that could change.
MassSolution believes that crowdfunding trends will shift away from so-called social projects and more toward small and startup businesses.
Crowdfunding works when a prospective startup or small business offers either a slight interest return or stake in a company in exchange for a small loan. Rather than just accepting a loan from one bank, members of the public can invest in any particular project.
U.S. regulators are considering new rules for this relatively new form of raising business funding, including what to do in the case of failure, when a funded business can not deliver its promised return. In the U.K., where crowdfunding is also very popular, tax breaks are offered for investing in crowdfunding and other “seed stage firms.”
A Call to the SEC to Require Valuation Disclosure
The Jumpstart Our Business Startups (JOBS) Act is a year old and we’re still waiting to see how the U.S. Securities and Exchange Commission will implement it. In particular, it’s “crowdfunding” provisions.
The JOBS Act makes it easier for companies to sell stock to investors who are wealthy (i.e., they meet the SEC’s “accredited investor” standard) and also, potentially, to small investors. Purportedly, the delay is due to difficulty reconciling the JOBS Act with the SEC’s mission to protect investors.
No matter how the law is implemented, I have a suggestion for how to protect investors that could also help companies compete for capital; require that all companies disclose the valuation that they give themselves when they offer stock.
[Edited by Editor]
AmyM
It will be interesting to see what kind of regulations the SEC issues for the crowdfunding provisions in the JOBS Act. We are already seeing the potential for online marketplaces to open investment opportunities to the public in the renewable energy sector. http://www.everblue.edu/blog/online-platform-brings-more-solar-more-people Residents of California and New York are taking advantage of investment opportunities that allow the average investor to make a difference, and make money – within state securities laws. A favorable ruling from the SEC could expand these opportunities and have a huge impact on the deployment of clean energy.